The COVID-19 pandemic has accelerated the digital transformation journey, with increasing numbers of non-finance digital brands embracing Banking as a Service (BaaS).
At the same time, there remains a huge opportunity for banks to gain customers and offer a greater range of services to existing clients. BaaS is increasingly seen as a way to complement banks’ core businesses, according to a new report by Equinix.
It offers an easier, cost-effective way to get new products to customers and access new geographies. With the embedded finance industry set to be worth $7.2 trillion by 2030, early adopters will be the ones positioned to steal a march on their rivals by exploiting new revenue streams.
Business leaders have been talking about disruptive technology for years now. But few could have imagined the catalyst for disruption that 2020 had in store for them when the COVID-19 pandemic hit
The coronavirus effect
The coronavirus forced companies to adapt and adopt new ways of operating. Many were forced to move online when their operations locked-down and socially distanced customers turned to digital channels to execute transactions and maintain relationships.
While vaccines will help people get back to pre-COVID modes of behaviour, the long-term digital shift has become a permanent feature of everyday life, particularly as e-commerce has become more widely accepted by consumers.
For banks this has been a particularly challenging time. Lockdown conditions have reduced footfall into branches in favour of online banking. However, this has also happened at a time of great change for the industry where new technology is disrupting established business models.
Indeed, while it would have been very difficult for non-finance brands to provide many of the services offered by banks in the past, the emergence of Banking as a Service (BaaS) has made it easier for new players to begin offering a range of products.
Until recently it would have been necessary for brands to partner with banks to build an application for their customers – often a frustrating and laborious process.
But BaaS – through the use of APIs and licensed banks’ secure and regulated infrastructure – has now removed much of the time and cost previously associated with the process and made it much easier for brands to embed services into their own offerings.
Other beneficiaries Digital non-finance brands that have benefited from the shift to online and e-commerce during the lockdown conditions of the COVID-19 pandemic are increasingly looking to add financial services to their offering to meet customers’ needs.
As such, there are now a greater number of competitors to banks in the form of challenger banks and digital-only players. And the number is likely to increase in the years ahead.
That said, traditional banks are becoming increasingly aware of the opportunities that BaaS can provide to get new products into the market and access new geographies.
Some three-quarters of respondents to the Equinix BaaS Survey said they were now more likely to use BaaS as a route to market for new products, with the overwhelming majority (88.9%) viewing it as a productive way to bring products to market rather than building them in-house.
And, they are more likely to partner with third-party providers to facilitate new products and services since the COVID-19 pandemic began, with many allocating more to their IT investment budgets.
Increasingly, banks see BaaS as a way to complement their core offering, although there are some signs that it is becoming just as important.
As well as reaching new customers and geographies, banks that partner with BaaS providers are able to focus on their strengths.
This means not being forced to absorb the costs of doing business. Huge sums are being invested into the BaaS space.
These investments will ensure that service providers can build offerings to meet the needs of the embedded finance industry.
Recent capital raising has demonstrated the size of the opportunity for investors, with London-based BaaS provider Railsbank raising $37 million in November and European BaaS platform SolarisBank securing €60 million in June.
With so much money being invested into the lucrative space it’s not surprising to see traditional banks increasingly offering BaaS services with their existing banking licences, allowing them to provide a more holistic offering that other providers cannot.
Large banks are finding revenues under pressure
As a result, they too are looking to the BaaS opportunity to help plug the emerging gap in their balance sheets.
There are several players that have entered the market, such as BBVA – which has become a key player in the market – and, more recently, Goldman Sachs – which is looking to BaaS to diversify away from its traditional trading and investment banking business.
With the COVID-19 pandemic having accelerated the digital transition, it’s likely that BaaS will play an even greater role in the lives of clients and consumers, particularly as new services and products are offered online.
As such, banks and brands that embrace BaaS quickly will likely steal a march on their competitors who are arriving late to the party.